Author Topic: Is Property Tax a tax on capital?  (Read 834 times)

seattleite

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Is Property Tax a tax on capital?
« on: April 15, 2019, 04:34:06 PM »
It's been a year since I read Piketty and I'm still trying to digest it. One thing that I've been thinking about is a tax on capital. As far as I can tell the only tax on capital we have in the United States is property tax, and it's about 1% in most parts of the US. Are there any others that I'm not away of?

As a post-FIRE Rentier, to use his nomenclature, I have minimal income tax on my capital gains and dividends — In fact it's zero at the federal level — And I pay a consumption tax when I buy non-grocery items. I don't own property so I'm not paying property tax directly.

Thinking this through it's kind of amazing how little I pay directly in taxes. It also makes me want to own a house that isn't worth a lot and won't appreciate in value. :-P

FIREstache

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Re: Is Property Tax a tax on capital?
« Reply #1 on: April 15, 2019, 05:46:38 PM »
I wish I was only paying 1% property tax.  I'm paying approximately 3.2% of my home's actual market value.  I'm still employed and am paying almost 20% on my capital gains distributions and dividends.  And when I spend any capital, I'm taxed about 10% on the purchase as well.  Too many taxes.

seattleite

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Re: Is Property Tax a tax on capital?
« Reply #2 on: April 17, 2019, 04:56:46 PM »
Wow, I didn't realize they got that high. I've lived in Seattle, the Bay Area, and Louisville and they have all been around 1%, here it's more like 1.25% depending on the part of town.

BicycleB

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Re: Is Property Tax a tax on capital?
« Reply #3 on: April 17, 2019, 05:13:32 PM »
Yes, property tax is a tax on capital.
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For perspective, compare the tax rate on real property as a % of the the capitalization rate (expected profit from rent if the property were owned free and clear). So if your property tax is 1.25% and the capitalization rate in your city is 5%, the tax is equal to 25% of the cap rate.

I guess for the numbers in the example I gave, the cap rate without tax would 6.25%, so really the tax is 20% of the tax-free cap rate. To me it seems sort of in the ballpark of other income-related taxes, such dividend tax and tax on ordinary income. Just a thought.

PS. So if a wealth tax were added to the system with no other changes, it might dramatically increase the real rate of tax on... well, on real property.

Income from real property is also taxed as income, though sheltered by deduction. So under a regime that adds a wealth tax to the existing tax system, a real estate investor might be subject to 3 types of tax due to owning one property.
« Last Edit: April 17, 2019, 05:19:06 PM by BicycleB »

seattleite

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Re: Is Property Tax a tax on capital?
« Reply #4 on: April 17, 2019, 05:51:01 PM »
I was in the same place you were two years ago — And honestly I never really cared about how much I paid in taxes. But now that I'm trying to build a life that doesn't involve having to go to work again I am concerned about taxes that slowly but constantly drain my resources.

I can deal with cap gains taxes — And with our current expenses we pay nothing in cap gains taxes at the federal level and only 6% at the state level, and honestly if we are bumped up to 15% because we sell more or because the tax laws change, honestly I'm not that concerned. We are still considered low-income Rentier these days and the tax policy favors us. Seriously, no FICA, yay!

The cool thing about sales tax is that you can optimize it. We don't pay sale tax for groceries and that's one of our biggest expenses. The more I do myself the less I pay in sales tax. It's win-win in many cases.

maizeman

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Re: Is Property Tax a tax on capital?
« Reply #5 on: April 17, 2019, 05:58:38 PM »
Like you, I cannot think of any other taxes specifically on capital itself (rather than capital gains or on income produced by capital) in the USA.

3.2% is well on the high end for property tax. I'm guessing from the phrase "actual market value" there are probably some issues with how the value of the property is being assessed going on. But there are a fair number of states with property taxes near or above 2% of assessed value.


Buffalo Chip

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Re: Is Property Tax a tax on capital?
« Reply #6 on: April 17, 2019, 06:29:53 PM »
Many states have taxes on production equipment and personal property which is in effect s capital tax. Also, death taxes are a tax on accumulated capital. There are intangible assets taxes in a few states.

If politicians can figure out a way to tax it, they will.

maizeman

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Re: Is Property Tax a tax on capital?
« Reply #7 on: April 17, 2019, 06:54:09 PM »
Many states have taxes on production equipment and personal property which is in effect s capital tax. Also, death taxes are a tax on accumulated capital. There are intangible assets taxes in a few states.

Do you know which states tax intangible assets? I'd be curious to read more. Also by intangible, do you mean that in the corporate finance speak (things like goodwill, brand identity, etc) or as bonds and stocks rather than real estate.

Buffalo Chip

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Re: Is Property Tax a tax on capital?
« Reply #8 on: April 17, 2019, 07:01:03 PM »
Many states have taxes on production equipment and personal property which is in effect s capital tax. Also, death taxes are a tax on accumulated capital. There are intangible assets taxes in a few states.

Do you know which states tax intangible assets? I'd be curious to read more. Also by intangible, do you mean that in the corporate finance speak (things like goodwill, brand identity, etc) or as bonds and stocks rather than real estate.

Offhand, I think TN, FL, and NH have intangible taxes. It’s usually a tax on financial assets such as bonds or stocks. VA taxes production equipment and personal property.

Papa bear

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Re: Is Property Tax a tax on capital?
« Reply #9 on: April 17, 2019, 07:34:51 PM »
Many states have taxes on production equipment and personal property which is in effect s capital tax. Also, death taxes are a tax on accumulated capital. There are intangible assets taxes in a few states.

If politicians can figure out a way to tax it, they will.

Estate taxes are taxed when there’s a transaction.  Person A dies, assets transfer to person B. If you live in perpetuity, there’s no tax on wealth or capital.  Person A is never taxed on their capital.

I do find it strange that some states tax production property and intangible assets. Though that tends to be business assets, not personal.  I’m not up to date on most state taxes anymore.

Property taxes are my “least favorite” of taxes.  You never really own real property, you are merely leasing it from the government.


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OurFirstFire

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Re: Is Property Tax a tax on capital?
« Reply #10 on: April 17, 2019, 07:46:26 PM »
Another hidden wealth tax is the lack of inflation-adjsuted basis for investments.  If I own a stock that increases in value by 2% per year and then sell, I have to pay capital gains tax on the 2% gain, even though in real terms I haven't gained value due to inflation. 

This is also before you even start to consider whether inflation itself is a tax on wealth.

maizeman

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Re: Is Property Tax a tax on capital?
« Reply #11 on: April 17, 2019, 08:07:11 PM »
Many states have taxes on production equipment and personal property which is in effect s capital tax. Also, death taxes are a tax on accumulated capital. There are intangible assets taxes in a few states.

Do you know which states tax intangible assets? I'd be curious to read more. Also by intangible, do you mean that in the corporate finance speak (things like goodwill, brand identity, etc) or as bonds and stocks rather than real estate.

Offhand, I think TN, FL, and NH have intangible taxes. It’s usually a tax on financial assets such as bonds or stocks. VA taxes production equipment and personal property.

I was able to find info on interest/dividend taxes in TN and NH, not not anything on taxing you on the property itself, just on the income from it. Obviously that doesn't mean it doesn't exist, I just cannot find anything with the search terms I am plugging into google.

I know MO has a personal property tax that essentially only applies to cars. But I wouldn't consider that a tax on capital just because I don't consider my car to be a form of capital (it's a depreciating asset). Maybe if it also applies to folks like Avis or Enterprise for them a tax on the value of cars would indeed be a tax on a form of capital.

kms

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Re: Is Property Tax a tax on capital?
« Reply #12 on: April 17, 2019, 09:00:07 PM »
I pay 4.25% on my house, the value of which is assessed every year by the appraisal district and goes up every single year. You can file a protest but it's a moot point because they always reject it based on the fact that the value of your neighbor's house has gone up, so yours must have as well. Q.E.D.

That 1.9% average for Texas is really cute. It's closer to 5% when you live in one of the major hubs (Dallas, Houston, San Antonio, Austin) where houses and properties have grown very expensive and closer to 0.5% in rural areas where land is practically free.

seattleite

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Re: Is Property Tax a tax on capital?
« Reply #13 on: April 19, 2019, 09:41:04 AM »
Another hidden wealth tax is the lack of inflation-adjsuted basis for investments.  If I own a stock that increases in value by 2% per year and then sell, I have to pay capital gains tax on the 2% gain, even though in real terms I haven't gained value due to inflation. 

This is also before you even start to consider whether inflation itself is a tax on wealth.

Oh man, I hadn't even considered the taxation of the inflation component of the capital gains. <facepalm> Imagine what that was like in the 70s when inflation was high.

BicycleB

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Re: Is Property Tax a tax on capital?
« Reply #14 on: April 19, 2019, 11:48:33 AM »
I pay 4.25% on my house, the value of which is assessed every year by the appraisal district and goes up every single year. You can file a protest but it's a moot point because they always reject it based on the fact that the value of your neighbor's house has gone up, so yours must have as well. Q.E.D.

That 1.9% average for Texas is really cute. It's closer to 5% when you live in one of the major hubs (Dallas, Houston, San Antonio, Austin) where houses and properties have grown very expensive and closer to 0.5% in rural areas where land is practically free.

Curious. I live in one of those hubs and paid a little over 1.5% this past year.

I had an advantage because of laws that limit the rate of tax increase - my tax hasn't caught up with the property value. But if the house were bought from scratch at assessed value, which for me appears to be very close to market, property tax would be right around 1.9%.